Capitalogix

The Return of The SPACs

I've shared several links about SPACs, in the past few months, as they have gotten increasingly popular and relevant.

SPAC stands for Special Purpose Acquisition Company. A SPAC is a company with no commercial operations, formed to raise capital through an IPO to acquire existing companies, technologies.

A typical IPO creates new public shares of a formerly private company while a SPAC merges a private shell company with an already existing public company. 

It's basically a backdoor way to turn a private company public overnight. Click here to see popular SPACs from 2020. 

They've been around for decades – but SPACs have been increasingly popular recently. Making that point, according to Bloomberg, SPAC dollars raised in 2020 beat the total from the previous 10 years combined.

via RSM

SPACs are becoming popular to businesses because they're seen as a safer way to go public in a volatile environment. They're also becoming popular to investors because the stock value often jumps pre-acquisition.  Nevertheless, the reality is that the average SPAC underperforms the S&P 500 on any given timeframe.

via Bloomberg

The reality is that most "buzz" products underperform the S&P – and most things that become too popular ultimately end up losing their edge. 

Barry Ritholtz put it well in his opinion piece:

The successful products we encounter every day are the result of initial failure. While positive outcomes are all around us, hidden from view is the iterative process of repeated failed attempts that lead to improvement. The world is filled with fantastic products from wildly successful companies, making it easy to overlook the many small gains and occasional big breakthroughs that helped them achieve this success.

For businesses looking for access to capital, SPACs are a legitimate option worth considering.  However, for investors looking for the next new alternative asset class to invest in, SPACs may not be what you are looking for in the longer term. 

What do you think?

 

 

Gong Xi Fa Cai & Happy Valentine's Day

Friday was the Lunar New Year. Normally, Jen and I would travel to Indonesia to spend it with her family, but it didn't happen this year. 

Regardless, Gong Xi Fa Cai … which translates to "Best wishes for a prosperous New Year!"

It's interesting to think about how many New Year celebrations there are.  In addition to Chinese New Year, Muslims have Hari Raya Idul Fitri; Jews have Rosh Hashanah; Persians have Nowruz; and of course, there is January 1st (and there are many others).

Regardless of your chosen New Year, it provides an opportunity to celebrate, share, reflect, plan, and commit to the right actions.

And how fitting for it to be Valentine's as well, so I can celebrate, share, etc. about Jen as well. 

I met Jennifer in April of 2004, and we got married in January of 2008. So, last month we celebrated our 13th anniversary. 

On one hand, I can remember the day I met her like it was yesterday.  On the other hand, time feels like it's moving faster every day.

Throughout these years, and especially in 2020, I remain thankful for her care, insight, presence, and patience. 

As an entrepreneur, I have a "tense" problem.  For me, the future and present are often blended.  The present is my tool to create the future I imagine and desire.  Meaning, I imagine the future I want – and then I find the path to create (or manifest) that destiny. 

Not surprisingly, some of the things that were easy to imagine were hard to bring into reality (in a reproducible, efficient, and effective manner or process) … And these things seem to take forever.  Yet, as long as you continue to make progress, the result is inevitable.

I am consciously trying to be more mindful and grateful for the progress (and even the minor moments, wins, or curiosities) before me.  The truth is that if you fail to notice them, you don't experience them (even though they happened).

Here is to experiencing all that you need or want.  And, as for the rest, I hope it serves as the raw material, learning, or fuel to get you there faster.

Onwards!

Why Is Tom Brady So Good?

In 2017, I wrote an article "asking" why the Patriots were so good. 

It's now 2021 ... Tom Brady and the Patriots have parted ways. The Patriots had a middling season – while Tom Brady, who is now the quarterback of the Tampa Bay Buccaneers, made it to his 10th Super Bowl appearance. 

There is a difference between 'luck' and 'skill'.

Both exist ... yet, luck favors the prepared.

In life, as in sports, hard work often beats talent (especially if talent fails to work hard).

Don't get me wrong - all the commentary about the Patriots in 2017 is true. Bill Belichick is an amazing coach with a storied career (even without Brady). 

But, when you see this picture from the 2000 NFL Combine, it's hard to believe that Tom Brady would be a 6-time Superbowl MVP taking the Buccaneers to the Super Bowl in his first year with them. All at the geriatric (for an NFL player) age of 43. 

via CBS Sports

When I talked about the Patriots, I focused on the fact that they were a well-oiled machine with a powerful framework of success that allowed individual greatness to shine. 

I think Brady's continued success is emblematic of that. 

Tom Brady is a paragon of culture, process, and hard work. Much of his approach was molded by his time with Belichick, but of course, he gets enormous personal credit as well. 

He expects the best of himself and brings out the best in his teammates. That's enabled him to stay a top-level competitor despite not being the strongest, fastest, or most mobile QB (and that was when he was young). 

The System is the 'system'; but, within it, you can measure what works, who contributes, and use it to identify the best things to try next.

Win, lose, or draw ... some things speak for themselves.

7 Levels of Twinkle, Twinkle, Little Star

Sometimes insight and inspiration come from strange places. 

I stumbled upon a video of a Japanese man playing the lullaby "Twinkle, Twinkle, Little Star" on the piano at 7 different levels of intensity. It has almost 5 million views. Check it out. 

 

hat-tip to David Kotok for the video via Cateen かてぃん

On top of being an impressive feat of skill, I couldn't help but relate it back to our tendency towards pattern recognition and heuristics. 

 

Even at level 7, it's not hard to hear the iconic lullaby. Whether you hear the simple version or a complicated version, somehow you know that the base is the same.  The human brain is great at recognizing patterns (sometimes too great, finding patterns that aren't there).

 

As an aside, I have three distinct sets of clothes in my closet.  I think of them as fat boy clothes, skinny boy clothes, and clothes.  If I look at Facebook, it's easy for me to see (simply by looking at my face) when I'm picking clothes from each of those sections in my closet. But how does a facial recognition software know that I'm still me (at weights ranging from 200 to 250 pounds)? Or that I'm still me in a profile picture taken eight years ago.  Somehow you have to recognize the match despite the mismatch.

 

Similarly, how does pattern recognition software recognize a pattern that might happen over a period of minutes versus that same pattern when it occurs over a period of seconds or days?

A simple video - but a great reminder. Hope you enjoyed it. 

 

Here Are Some Links For Your Weekly Reading - January 31st, 2020

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• American is the First US Carrier To Use Digital Health Passport. (Simpleflying)
• Tim Cook On Why It's Time To Fight the "Data-Industrial Complex". (GQ)
• Wikipedia Turns 20. (MorningBrew)
• The 2500-Year-old Technique To Make Ice In the Desert. (Medium)
• The San Francisco School District's Renaming Debacle Has Been a Historic Travesty. (MissionLocal)

 

Trading Links:

• Public Market Verdict: the Unicorn Binge Wasn't Crazy; It Was Really Profitable. (Crunchbase)
• Bitcoin Investors May Lose Everything, Central Banker Warns. (Bloomberg)
• The SPAC Boom Rolls On Into 2021. (MorningBrew)
• FAA Clears Way For Commercial Drone Deliveries With New Rules. (ABCNews)
• Apple Overtakes Amazon To Become World's Most Valuable Brand, While Tesla is the Fastest-growing. (MarketWatch)

Wolves of r/wallstreetbets: What Happened With Gamestop & Robinhood

GameStop has been on a steady decline (both as a stock and a company) for many years. It has been like watching Blockbuster get replaced with Netflix all over again.  Why would people go to a retail store when they can consume a wider range of products from the comfort of their home?  Obviously, the pandemic made things worse for them.  As a result, short sellers lined up to bet on their demise.

So, how can you explain the jump in GameStop's share price from $17.50 at the beginning of 2020, to almost $400 on Thursday?

You could argue it started with new leadership from Ryan Cohen and their surprisingly stable financials despite the turmoil. Nonetheless, it would be hard to justify a sudden $28 Billion dollar valuation based on that alone. 

The real reason for the price jump, and the story everyone is talking about, is the war of the retail investor (fueled primarily by a Reddit forum called r/wallstreetbets) on Wall Street. 

 

It's a complicated situation, and news stories tend to have their own biases and agendas, so I thought I would bring you up to speed on what happened, the legality, and the potential ramifications.

What Happened?

Earlier this month, Redditors realized that GameStop's stock ($GME) was shorted to 140% of tradable shares due to positions by several funds including Melvin Capital. Most of those positions are passively held, so the short-interest accounted for 300-500% of the float (actively traded shares).  Theoretically, this shouldn't be possible - but it was allowed by the brokerages and market makers. 

This allowed the Redditors, and other retail investors, to buy the stock aggressively, raising the stock price, and forcing the shorts to cover. This is called a short squeeze. 

By Wednesday, retail investors' actions raised the price 700% to over $300. Melvin Capital was out ~3 Billion dollars and ultimately got bailed out by Citadel and Point 72. 

On Thursday, after calls for help from Wall Street grew louder, several online brokers blocked the buying of GameStop and other stocks that were trending on Reddit (like $AMC, $NOK, and $NAKD) and canceled some trades. Those brokers still allowed users to sell their shares.

 

via Statista

The stock price of GameStop and AMC tumbled as a result and the media went into an uproar.

Questions of legality were raised toward the potential market manipulation of Robinhood, but also r/wallstreetbets. 

Were Robinhood's Actions legal?

Separate from legality, the optics of the situation are very bad for Robinhood. First, Citadel, who bailed out Melvin Capital, is one of Robinhood's vendors. Second, Robinhood's motto is about access to all, and it heavily markets brand beliefs consistent with the ideals of the fictional heroic outlaw, Robin Hood (who took from the rich to give to the poor).

Voices like Mark Cuban, Elon Musk, AOC, and Ben Shapiro all came out against Robinhood for limiting retail's ability to trade. An odd show of unity in these divisive times. There are also several class-action lawsuits and the SEC is reviewing the situation.

Robinhood justified its actions by claiming they were forced due to increased volatility, and risk management with their brokers. Both Robinhood and Citadel strongly denied any market manipulation claims.

Legally, these brokers state in their contracts that they are allowed to restrict trades for almost any reason. As well, they have liability and protection obligations to their consumers, market makers, and clearinghouses.  

The situation with $GME is undeniably risky. Trading is a zero-sum game, and for every crazy win story you see of someone paying their mortgage, someone is losing their house. As $GME gains popularity, or r/wallstreetbets tries to replicate this success with other securities, the late majority are (almost by definition) going to be the least qualified and the most at risk of losing money they probably can't afford to invest. 

This episode shined a light on clear issues with the Stock Market. 

However: 

• Robinhood only limited the ability to buy these stocks, which by design lowers stock prices.
• Before retail investors capitalized on the situation, these same brokerages let institutions short 140% which would have been a death sentence for GameStop. 
• It's on the NYSE (in this case) to shut down the trading of a security, and they only do it for fraud or if there is material information a company hasn't disclosed yet.
• The timing and relationships bring good reason to question the validity of Robinhood's statements.

While the theoretical action of limiting trading is legal for Robinhood - this specific case is questionable at best. 

Were r/wallstreetbets actions legal?

Many big-time bankers have been arrested for market manipulation in the past. It's a point of many of the regulations in Wall Street today. 

This specific example is very complicated. On Reddit, a public forum, many users urged each other to buy stock and to hold in the face of adversity. The initial logic behind buying $GME was based on solid fundamentals, and the observation about Melvin Capital's position - but quickly became a momentum play capitalizing on the mania. You could argue it was collusion, which is bolstered by the disparity between the future value of GameStop as a business and its current stock price.

It's hard to prove that there was a coordinated effort to manipulate stock prices here. To me, it looks like a mob of uninformed investors following the advice of an educated investor and creating a trend. A common theme. Some claim it resembles a classic "pump-and-dump" scheme that you would find by the likes of Jordan Belfort and the penny stock market.

I think it's very unlikely you see anyone charged here - but I do think it's likely you see new regulations as a result of this. 

While the industry is already heavily regulated, the world is changing, and we have to keep up or deal with the consequences. 

New strategies or capabilities push boundaries and test limits in new ways.  In the short term, someone has a new advantage, but in the long term, the system evolves and gets stronger.

The Bigger Picture

I've seen many people concerned with the decision-making behind retail's investment in $GME.  As a practical matter, it doesn't really matter. 

The initial posts on Reddit showed a good understanding of fundamental trading, but most traders who followed that advice wouldn't know the difference. 

I'd argue it's not that different from most of Wall Street. Many don't have an edge, they simply piggyback off of the success of the ones that do, whether by following their trades or starting a new firm with the lessons they learned at a bigger firm. 

The market is not the economy, and while GameStop is a great case study to prove that, at its core, it's not really a unique or new phenomenon. 

Value is an important part of a stock price.  But for many speculators, it is only part of the calculation. And beyond speculators, there are many types of market participants (e.g., governments, institutions, hedgers, etc.) and reasons to buy or sell things (including fun, excitement, a social belief, etc.), and rationales for their decisions (including systematic approaches, momentum, reversion to the mean, etc.) that combine to form the free market. 

A free market isn't necessarily a smart market ... and it doesn't need to be. But, part of what creates a growing and thriving market is the belief that it is safe, reasonably transparent, and reasonably regulated. Consequently, I would expect regulators to re-visit this and for them to re-look at the regulation of margin and other things. 

Expect increased volatility and noise. Expect more runs like this. Plan accordingly. 

Conclusion

Helping the average person take advantage of the Stock Market is a good thing. With that said, the "democratization of access" comes at a time when tech asymmetry is growing. The advantages to Hedge Funds and Institutional Investors are growing - regardless of regulation - due to better tech stacks, smarter algorithms, and teams of PhDs. Information asymmetry is decreasing, but data is only valuable if you can digest it.

The Stock Market is not just a game, and some believe it's worrisome that some retail investors feel like it is. 

In trading, there is a rule of thumb that says a trend continues until it stops.  Well, expect the bubble to pop for $GME (and the other stocks that may follow this pattern).  Why, because trends do stop ... and to quote Stein's Law - if something can't continue it won't.

Actions have consequences.  Many intelligent investors will be fine, but many other investors will be hurt.  To some extent, that is the consequence of a zero-sum market.  But with Democrats in power, I expect to hear more about this.

Perhaps it shouldn't have taken Wall Street getting hurt to start this discussion. Now the discussion has started.  At some level, it's not about what happened ... it is about what you do. 

It's unclear whether r/wallstreetbets will have the win they're looking for or whether Robinhood will get penalized. 

What do you expect to happen?

Using Lenses To Create Finer Distinctions

Wisdom comes from making finer distinctions ... but that only happens after bringing some order to the chaos.

I find myself relying on those ideas often because they have proven themselves in so many different situations. 

There are many ways to create finer distinctions.  I shot a video that shares a couple of examples of how "changing the lens" you use to look at a problem helps you see and solve things differently and better. 

Enjoy the video here.

Learning to ask the right questions, change timeframes, and assess how you can best use emotions to identify key opportunities and challenges are all ways that will help guide you through uncertain territories.  The video goes through these (and a few other techniques) that you can use as a catalyst to your thinking and planning.

It is easy to underestimate the value of a good idea.  Sometimes, it only takes one to change everything.

Hope this helps.

Let me know what you think.

Here Are Some Links For Your Weekly Reading - January 24th, 2021

Here are some of the posts that caught my eye recently. Hope you find something interesting.

Lighter Links:

• Meet the Man On a Controversial Mission To Preserve and Digitize Your Brain. (DigitalTrends)
• What is Consciousness? Scientists Compete To Find Out. (Bloomberg)
• Balinese Temple Monkeys are Sophisticated Thieves and Negotiators. (Economist)
• How Predictive Algorithms are Transforming Data Into Decisions. (JeffBullas)
• What is AI? The Human's Handbook to Computers that Think. (MorningBrew)

 

Trading Links:

• The Stock Market is At or Near the Most-expensive Levels Ever By Most Measures. When Will It Matter? (CNBC)
• Stock-Market Bulls Brace for Major Gut Check as Earnings, Fed and GDP Loom. (MarketWatch)
• David Einhorn Warns of Danger From Valuation-Indifferent Investors. (Forbes)
• How VCs and Founders See 2021 Differently. (TechCrunch)
• Virtual Reality Will Be a Trillion-Dollar Marketplace Within Five Years – Here's a Good Example Why. (MW)

 

Jim Simons and Renaissance Technologies

Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions with those ideas in his notoriously secretive hedge fund firm called Renaissance Technologies. 

As of January 2021, He has stepped down as chairman. Now, Peter Brown, the former CEO of the fund, has stepped up as chairman.

With Jim stepping down, I thought it was worth looking at the legacy he has left on not just the Hedge Fund industry - but on trading as a whole. 

He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors). 

His background is impressive.  Simons taught at Harvard and MIT and worked with the NSA.  Here is a video where he shares some thoughts in a 2015 TED talk interview.  It's worth a watch. 

TED via Youtube

Despite advanced math still being a mystery to many,  we rely on it more than ever as the foundation of many exponential technologies.

The Heart of AI is Still in Humans

Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money or pure trading quants, biased by the industry).

This hits on something important. 

Humans are still important ... and companies that pursue exponential thinking and exponential technologies still have to champion integrity, culture, and purpose.

 

Better Math is a Competitive Advantage - So is More and Better Data

We stayed ahead of the pack by finding other approaches and shorter-term approaches to some extent … but the real thing was to gather a tremendous amount of data

– Jim Simons

On top of his intelligent hiring and novel approach to trading, Jim Simons recognized that an impressive data pipeline - and the technological infrastructure to digest and analyze that data was a moat to competitors. 

It is hard to have an edge if you use the same process and the same data as your competitors.

As the flywheels of commerce spin faster, edges will emerge and decay faster.  Finding a solution is only a step in an ongoing process.  

Robust, reliable, and repeatable innovation at scale is a meaningful competitive advantage.  That implies that idea factories will become as important (if not more so) than factories that produce material products.  Likewise, innovation funnels will become more important than sales funnels. 

The world changes at the speed of thought ... and as technology continues to improve ... even faster.

Onwards!

Where Do We Go From Here?

Yogi Berra once said, “It's tough to make predictions, especially about the future.”

I don’t normally post articles where I predict things. Nonetheless, I feel the need to comment on what is happening in America and what I suspect happens next.

My political beliefs are not really important here. But for context, I am somewhat fiscally conservative and somewhat socially liberal. It puts me pretty squarely in the middle.

As an entrepreneur and citizen, I feel compelled to find the "signal-in-the-noise" to understand and anticipate the game that’s being played, what the playing field looks like, and the best way forward.

For all the front stage calls for "unity & healing", behind the curtain, the actions of both sides aren't supporting the words they're saying. 

When the Democrats first announced the second impeachment, I assumed it was designed to steal news cycles (a nice trick that Trump taught them) and time cycles to minimize potential damage till the inauguration. Meaning that any time they forced the Trump administration to spend discussing what was happening or defending themselves was time taken away from political gamesmanship and last-minute actions that the new administration would have to deal with later.

Meanwhile, perhaps the reason Mitch McConnell has been sending mixed signals about protecting Trump is to avoid angering a meaningful portion of his base – while preparing to create the space to launch his new post-Trump Republican leadership slate (and a powerful Trump hurts those plans).

Ultimately, however, I do not believe that either party really wants to pursue impeachment fully at this point. Consequently, I suspect that the Biden administration will slow down the impeachment (and morph it into other strategies and tactics). I can’t imagine that the new administration will want to give Donald Trump even more of a public forum to broadcast his messages to the whole world (considering what's happening with Big Tech removing his platform).  It makes more sense to move on and shift focus.

Strategically, it seems more likely that they’ll go for a censure. With that, I suspect that they will attempt to strip post-presidency benefits and courtesies (including financial, access, and information).  Further, it wouldn’t surprise me if they find a way to prohibit him from having any public lands or things (like airports) named after him. This would accomplish three things.  First, Democrats would consider it a win and a signal to the world.  Second, it would hit Trump where it hurts (in his ego and legacy). Third, it would also support the new Republican leadership's goals by minimizing the chance that Trump could limit McConnell's power or fracture the party further.

Consequently, the real attempts to prevent Trump (or his family) from running for president will be accomplished via felony charges out of places like New York, Georgia, or DC.  Even though the motivations may be political, I don’t think it will be a political process.  Kind of like what they did to Al Capone.  That means that I expect both parties to help various prosecutors keep Trump busy, weaken him, and limit his future impact.

As for the markets, to some extent, what goes up must come down. The pendulum swung pretty far and was propped there for longer than most thought possible. Clearly, we are due for a correction.

Global economic weakness (and falling GDPs), along with the pandemic (and challenges with a vaccine rollout), will all contribute to short term volatility.

However, I think the Democrats will be far less committed than Trump was to propping markets up in the short term. They would prefer any reversion to the mean to happen quickly – so they can blame it on the prior administration.

With that said, the midterm elections are coming up quickly (and control of the Senate likely to be an even hotter topic). Consequently, I expect the Democrats to push hard to help the markets recover coming into the end of their first year.

Of course, all of these thoughts are speculation and may not come true. 

I’d love to hear your thoughts.

We certainly live in interesting times.